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Obama AIG Fix-It Man Bets on Fannie and Freddie Turnaround

Written by: Dan Freed04/05/13 - 4:09 PM EDT

Tickers in this article:
AIG FMCC FMCKJ FNMA

NEW YORK (TheStreet) -- Jim Millstein, the restructuring guru who oversaw the Treasury's former 79.9% stake in AIG, owns preferred shares of Fannie Mae and Freddie Mac on the view that the two government-sponsored enterprises should be recapitalized with private sector money -- a plan Millstein himself has been promoting.

Indeed Millstein and Phillip Swagel, a former Treasury official during the George W. Bush administration, have been the "leading voices," arguing for privatization of the GSEs, according to a March 20 report from CRT Capital Group's Michael Kim.

Millstein, who left the Treasury in February 2011, says he has spent the past year and a half formulating and promoting his plan to fix the U.S. housing market, which now relies almost entirely on government support.

"Any time anyone has asked me -- inside the Treasury Department on the couple of occasions they've deigned to talk to me and on the Hill -- I've always told people about the investment," Millstein said during a series of phone interviews with TheStreet this week. The former Lazard and Cleary Gottlieb restructuring specialist also hopes the firm he founded after leaving the Treasury, Millstein & Co., can land an assignment helping to implement the turnaround plan he has laid out in a 63-page white paper and a condensed 18-page version.

Millstein says he told Swagel, a professor at the University of Maryland who testified before the Senate Banking Committee in February during a hearing on housing finance, about his investment when they co-authored an Oct. 12 opinion essay in The Washington Post arguing the Treasury should "restructure, recapitalize and privatize Fannie and Freddie's mortgage-guarantee businesses."

Millstein's investment is not disclosed in the essay, however, and Swagel says he was not aware of Millstein's investment at the time of publication.

"My experience is that Jim is a really honest, straightforward guy. He and I could have different recollections on what he told me and what I knew, but that doesn't take away from my view of him," Swagel says. Swagel, who has publishedseveralpapers explaining his thinking on housing reform, says he has "absolutely no investments in anything remotely related" to the issues on which he has been advocating.

Millstein declines to say how much he has invested in Fannie and Freddie preferred shares, though he says the amount is something he "can afford to lose," adding it is "a total speculative bet." Millstein adds he has more invested in a house he built and hopes to sell. He believes that sale, like the rest of the housing market, would be adversely affected if government officials followed through with their apparent intention to wind down Fannie and Freddie.

"Should I have disclosed that I'm a builder and house owner who would be benefited from stable mortgage credit as well as having speculated in the preferred?" he asks.

"If you want people like me who are experts to participate in the policy debate and publish and add their views to the news, and you said to them 'You have to disclose everything -- your personal investments, your personal business, your existing business that would be affected by your views,' the disclosure would be longer than the piece.'"

The Millstein & Co. white papers, which Millstein began circulating before the Washington Post essay, note that the firm "may purchase and sell securities, derivatives and other instruments issued by one or more entities which are the subject of this report and may currently or in the future provide advisory, investment banking and other securities related services to such entities and to investors in the securities issued by such entities." Politico Pro first reported the Millstein preferred share investment April 2.

Millstein is not the only person who thinks GSE preferred shares are worth a gamble. Hedge funds including Akanthos Capital Management and Bronte Capital have hung onto investments in GSE preferred shares for well over two years .